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'Best Idea' Mutual Funds
Are Drawing Mixed Reviews

By

Ken BrownStaff Reporter of The Wall Street Journal

Updated July 18, 2000 12:01 a.m. ET

Mutual funds generally haven't been great success stories for the big brokerage houses. But several Wall Street firms believe they have finally found a fund formula that works, at least in the category of raising lots of cash.

Goldman Sachs Group Inc.'s
Goldman, Sachs & Co. is the latest firm to start a mutual fund based on the picks of its research analysts and market strategists, and has raised $250 million since the
Research Select Fund
launched one month ago. The fund's start is the best-ever for the firm.

The fund, billed as a way for little guys to get access to Goldman's vaunted research team, joins offerings from
PaineWebber Group Inc.
and
Morgan Stanley Dean Witter
& Co., each of which in terms of initial assets was among the most successful fund launches at those firms as well.

Goldman's fund, which began trading on June 23, is a concentrated offering that holds between 25 and 35 large-company domestic stocks. The picks are chosen by Goldman's U.S. Stock Selection Committee from the 300 to 500 stocks on the firm's list of recommended issues. The committee has been maintaining this list, which is available only to the firm's institutional and high-net-worth clients, since September 1998.

"For the first time, Goldman is providing access to its best names to the general investing public," said Doug Grip, president of Goldman Sachs Mutual Funds.

But the fund raises questions for individual investors and has annoyed a few of Goldman's big clients. For example, some institutional clients, including big mutual-fund companies, feel like the list loses some of its luster if an in-house mutual fund is buying those stocks.

"Who is their client, this fund or us?" said Amy Crandall, an analyst at Loomis Sayles in Boston.

News of Changes

Goldman counters that its own fund hears about changes to the list at the same time its clients do, at the firm's 7:15 a.m. EDT morning call. The fund expects to track the performance of the list within 1%, Mr. Grip said, adding that the fund's managers can act immediately on shifts in the firm's stock picks or wait for better trading opportunities. Though he concedes that if there is dramatic news on a stock the fund would probably act quickly.

Others believe the fund itself will be operating at a disadvantage. Every major institutional investor will know exactly what and when the fund is buying and selling. So if the fund is getting in lots of cash, other investors can comfortably buy the stocks on the list, knowing there is a dedicated buyer out there.

The downside for individual investors in the Goldman fund is that it potentially would have to pay higher prices for the stocks it buys, meaning its returns could be lower. And if shareholders start to pull cash out of the fund, institutional investors could begin circling around the fund's biggest holdings, shorting or selling the stocks and driving the prices down, knowing the fund will have to be dumping the stocks.

These scenarios are unlikely to have any great impact until the fund itself gets larger, and Goldman says it will close the fund before that becomes an issue.

But the performance of its rival best-idea funds may be instructive. Morgan Stanley Dean Witter and PaineWebber currently have about $2 billion each in their funds, but in terms of performance, neither has been a star. Since its start in February 1998, the
Morgan Stanley Dean Witter Competitive Edge Best Ideas Fund
, has landed in the middle of the pack in the world-stock category. So far this year, the fund is up 2.21% through Friday.

PaineWebber's Bumpy Ride

PaineWebber's fund, launched in November, is based on the firm's 12-year-old Highlighted Stocks list, which has beaten the Standard & Poor's 500-stock Index every year since it began. Since the fund's launch though, things haven't gone as smoothly. So far this year, the fund, which invests in domestic stocks, has lost 6.07% through Friday, badly lagging behind the S&P 500's 2.77% return and ending up near the very bottom of funds in its category.

"I would take that as a warning shot, that just because you've got the entire research resources of a firm, that doesn't mean it will translate into a successful mutual fund," said Christopher Traulsen, a senior analyst at Morningstar Inc., the Chicago fund-tracking firm.

These performance numbers add weight to the evidence that buy-side analysts -- those analysts who work for big investors such as pension and mutual funds -- tend to be more successful stock pickers than so-called sell-side analysts who work for Wall Street firms that are seeking to get investment business from the very companies their analysts are following. In fact most successful mutual-fund companies have their own armies of analysts and rarely rely solely on Wall Street research for their stock picks.

The Goldman fund also has an above-average expense ratio of 1.50%, meaning the firm takes in $15,000 for every $1 million invested. By contrast, the average expense ratio for similar broker-sold funds is 1.28%, while no-load funds charge 1.16%, according to Morningstar.